Investment in Bitcoin is growing. More and more investors are joining the bandwagon, which has resulted in increasing discourses about the investment position of Bitcoin. Generally, Bitcoin is a speculative digital investment asset. Investors invest in Bitcoin expecting that the price will increase and they will then make a profit.
But Bitcoin is not just another investment asset. To begin with, it is unique. It differs from traditional investment asset classes like stock, gold, commodities, and bonds. It is a new digital asset whose value is largely speculative. We have witnessed the erratic price trends of Bitcoin over the years.
Yet, Bitcoin remains one of the most promising investment assets today and in the future. The idea that Bitcoin is a bubble is becoming stale by the day. One must understand that Bitcoin, and many other cryptocurrencies, are part of the digital transactions revolution. Bitcoin has been a significant trigger for adopting digital payment systems.
Although it remains illegal in many countries, its use is allowed. Crypto experts foresee a situation where more governments will embrace Bitcoin as a digital currency. Even if they don’t, Bitcoin inspires the adoption of Central Bank Digital Currencies (CDCs) like the digital Yuan in China.
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Risk on Versus Risk off Asset
Risk on and risk off are common terminologies in investment circles. They represent two opposite ends of the spectrum. On the one hand, risk-on implies a situation where investors pump more money into riskier investments. On the other hand, risk-off means investors pump more money into less-risky assets.
It is common for the price of high-risk assets to increase during the risk-off period. The prices of low-risk investments tend to fall. Likewise, low-risk assets will likely increase during the risk-off period, while the prices of high-risk assets will flop.
An important point to consider here is what constitutes a high-risk and a low-risk asset. Just from the terminology, a high-risk investment has higher risks. Good examples of high-risk assets include cryptos, mini-bonds, and Contracts for Difference (CFDs). A low-risk investment has lower stakes. Some low-risk assets include government bonds, corporate bonds, and high-yield savings.
Where Does Bitcoin Fall?
From the above definition of risk on and off assets, one could classify Bitcoin as a risk-on asset. Bitcoin is a risky investment mainly because of the price volatility. It is difficult to tell when the next crash will come. So, many investors tend to treat Bitcoin as a risk-on asset.
Typical of risk on investments, Bitcoin investors will tend to be very cautious. Most will react rapidly to market trends and dynamics. For example, if there is widespread speculation that the price of Bitcoin will increase, then the amount of money pumped into Bitcoin will surge. Likewise, a negative market trend will cause a massive divestment.
Unfortunately, there is a common misconception among crypto enthusiasts that Bitcoin is a good hedge asset. This assumption would mean that Bitcoin is a risk-off asset where investors can put their money as a hedge against negative market cycles. While this may be true when using Bitcoin as a haven against the inflation of fiat currency, it does not negate the fact that Bitcoin is a high-risk asset.
Parting Shot
Understanding and treating Bitcoin as a risk-on asset will help avoid suffering preventable losses. It will make investors more cautious and rational about how much to invest in Bitcoin at any particular time.
